The slowdown in the economy is very worrisome and we should pay attention to the arguments made by the former chief economist Arvind Subramanian about overestimating growth with the new gross domestic product data, says Raghuram Rajan, the former Reserve Bank of India governor.
The slowdown in India's economy is very worrisome and the government should pay attention to the arguments made by the former chief economist Arvind Subramanian about overestimating growth with the new gross domestic product (GDP) data, said Raghuram Rajan, the former Reserve Bank of India (RBI) governor. Sharing his views on the ongoing economic slowdown and its impact on India, Rajan said the country needs to give a fresh look at the way it computes the GDP as inaccurate data may lead to wrong policy interventions.
Talking to CNBC-TV18, Rajan, who is the Katherine Dusak Miller Distinguished Service Professor of Finance at Chicago Booth, said that in comparison to the 2008 financial crisis, the banks are better levered across the globe.
Edited excerpts from the interview:
There is a lot of fear about the global scenario in India as well. What is the world looking like to you? Is it looking like 2008 again with so much of risk aversion?
History never repeats. So, I think there is more leverage than there was in 2008, but it's not in the same places. Banks are less levered than they were then. On the other hand, some corporate sectors certainly in the United States are more levered, certainly China is more levered and of course, governments are more levered. So, leverage was a big factor in 2008. It's different today, not necessarily better, but different.
Second, I think the big issue today is not so much the financial sector frenzy, there is some, but really on trade and global investments and the worries are that if we don't pay enough attention, the old global order is going out of the window and there is nothing really to replace it to keep countries from doing things that serve their own risk rather than the global interest. So, it is a different world. Do I predict a big crash coming? I don’t know, but I do think that it is going to come from different sources and simply fixing the old problems is not going to prevent the new ones.
Estimates of India’s growth this year have been brought down rapidly. Many are expecting it now closer to 6 to 6.5 percent. What are your thoughts?
There are a variety of growth projections from the private sector analysts, many of which are below, perhaps significantly below government projections and I think that certainly, the slowdown in the economy is something that is very worrisome. You can hear businesses around worrying and complaining out loud that they need some kind of stimulus. But I also think that we should pay attention to some of the arguments made by the former chief economist Arvind Subramanian that in fact we may be overestimating growth with some of the new gross domestic product (GDP) data and I would suggest, and I have been saying this for some time, we need a fresh look from an independent group of experts at the way we compute GDP and make sure that we are not in a sense having GDP numbers that mislead and cause wrong kinds of policy actions.
That is about the number, but what about the nature of the slowdown? Is India in a structural rut? Do we need something like redux of 1991 reforms?
I have been saying for some time that I really do think we need a fresh set of reforms. And we need a fresh set of reforms informed by view on what we want India to be. I would love for that view to be articulated at the very top, here is the kind of economy that we want. One off programmes here and there don’t amount to a comprehensive reform agenda for the economy. What we call reform borrowing in international markets is not really reform, it is a tactical action. What we really need is an understanding of how we are going to propel this country by the 2-3 percentage point greater growth that it needs and that needs fixing the immediate problems such as in the power sector, such as in the non-bank financial sector and those need to be done yesterday, not in the next 6 months.
It is very important that those be tackled immediately. But we also need a new set of reforms which energise the private sector to invest. Sops, stimulus of one kind or the other, are not going to be that useful in the long term especially given the very tight fiscal situation that we have. Instead, bold reforms, well-thought-out, not jumping-off-the-cliff but
seriously thought-out reforms in a variety of areas which energise the Indian people, energise the Indian markets and energise Indian business. This is what we need today and I really hope we put our best minds to think about this because absent that, my sense is we are in for not-so-good times.